In 2026, many Pakistanis are opening their electricity bills and asking a challenging question: why does power continue to become more expensive, even when the country has more generation capacity than it can utilise? The answer lies in a highly controversial aspect of Pakistan’s economy—capacity payments to Independent Power Producers (IPPs).
Recent official data reveals that over the past five years, Pakistani consumers have paid a staggering Rs13.397 trillion to IPPs. Of that amount, approximately Rs7.275 trillion was allocated to plants for the actual electricity generated. This leaves over Rs6 trillion collected from ordinary electricity users and transferred to power companies for capacity that was never utilized. This situation has reignited a national debate about the functioning of the country’s power sector.
What Are Capacity Payments, and Why Do They Exist?
To really grasp the current crisis, it helps to look back at a deal that Pakistan made years ago. Beginning in the 1990s and stretching into the 2000s, the government sought to boost investment in its electricity sector, which had been struggling for a while. To attract private power producers, they signed agreements that included “capacity payments.” This means that these independent power producers were guaranteed payment just for being ready to generate electricity, even if the grid didn’t actually need it at that time.
At the time, the logic wasn’t unreasonable. Foreign and domestic investors were unwilling to build expensive power plants without a guaranteed return, and Pakistan badly needed to close a persistent gap between electricity demand and supply. The problem is that decades later, the assumptions behind those contracts no longer match reality, yet the payment obligations remain fixed.
The Numbers Behind the Outrage
The scale of the payments has become impossible to ignore. Annual capacity payments have climbed past Rs2 trillion in recent years, with some estimates putting the current annual burden at more than Rs3.4 trillion. Roughly 70 percent of what consumers pay per unit of electricity is now funneled directly to IPPs, making capacity charges, not fuel or generation costs, the single biggest driver of expensive power bills.
Since 2018, the base price the government pays to purchase power has risen by close to 96 percent, pushing electricity tariffs from around Rs16 per unit to Rs30 per unit and beyond. According to research from Pakistan’s own Planning and Development Institute, an estimated 30 to 35 percent of the average household’s electricity bill isn’t paying for energy at all. It’s covering debt repayment and inefficiency charges baked into the system, meaning households are effectively subsidizing decades of financial mismanagement every time they turn on a light.
Why the System Keeps Getting Worse: The Circular Debt Spiral
Pakistan’s power sector is trapped in what’s widely known as a circular debt crisis, and it functions like a chain of dominoes. Distribution companies can’t fully recover the cost of the electricity they supply, due to theft, technical losses, and unpaid bills, so they can’t pay generation companies in full. Generation companies, in turn, fall behind on payments to fuel suppliers, who then slow down or halt supply, leading to further outages. As of mid-2025, this circular debt had ballooned to more than Rs2.6 trillion, roughly $9.3 billion.
Making matters worse, some of the largest defaulters on electricity payments are government agencies themselves, both provincial and federal. In effect, taxpayer and consumer money is partly being used to cover the government’s own failure to pay its own power bills.
There’s also a newer twist accelerating the spiral: rooftop solar adoption. As more households and businesses install solar panels to escape high grid prices, fewer paying customers remain on the traditional grid to help cover the fixed capacity payments the government still owes IPPs. That shrinking customer base pushes tariffs even higher for those who remain, which pushes still more people toward solar, further shrinking the base in what analysts have described as a self-reinforcing spiral.
Who Benefits — and Who Pays the Price
Critics of the current system argue that some IPPs have benefited unfairly, allegedly under-reporting efficiency gains and over-invoicing the government under existing contracts, according to research from the Institute for Energy Economics and Financial Analysis. One frequently cited example involves a coal-fired plant operating at just 4 percent of its designed generation capacity, despite still qualifying for substantial capacity payments, contributing to steep increases in the tariffs charged to consumers.
The burden ultimately falls hardest on ordinary households and small businesses. Reports describe families cutting back on food and children’s education just to keep up with electricity bills. Industrial consumers face a parallel problem: high energy costs have made some locally manufactured goods less competitive internationally, with imported materials in certain sectors reportedly now cheaper than domestically produced alternatives. Rooftop solar, often floated as an escape route, remains largely out of reach for lower-income households, since a full home solar and battery system can cost more than a million rupees upfront, leaving the option available mainly to middle- and upper-income consumers.
Government Efforts to Fix the System
To its credit, the government has taken some steps to address the crisis. Under pressure from the International Monetary Fund, authorities have renegotiated power purchase agreements with several IPPs since 2024, terminating contracts with some plants entirely and securing discounted settlements from others. Some IPPs facing renegotiation could be shifted to “take-and-pay” contracts, under which the government would only pay for electricity actually consumed, rather than for capacity alone.
However, experts caution that these renegotiations need to be far more transparent and far more comprehensive to meaningfully reduce the burden. Given how deeply capacity payment obligations are woven into existing contracts, and how politically sensitive renegotiating decades-old agreements can be, progress so far has been described by analysts as a step in the right direction rather than a full solution.
What Real Reform Would Look Like
Economists and energy policy experts studying Pakistan’s power sector broadly agree on several priorities:
- Ending take-or-pay contracts in favor of take-and-pay arrangements, so consumers and the government only pay for electricity that is actually used.
- Full transparency in IPP renegotiations, including public disclosure of contract terms, plant performance, and settlement details.
- Addressing government-agency non-payment, so public sector defaults stop adding to the same circular debt burden that private consumers are asked to help cover.
- Reducing transmission and distribution losses, including theft and technical inefficiencies that prevent full cost recovery.
- Expanding affordable access to solar and renewable alternatives, so that escaping high grid costs isn’t limited to households who can afford expensive upfront installations.
Conclusion
Pakistan’s IPP crisis serves as a powerful reminder of how a solution aimed at attracting investment in a power-starved economy can inadvertently lead to greater challenges over time. While billions of rupees flow to power producers regardless of electricity usage, millions of ordinary consumers are faced with rising bills that reflect debt and inefficiency rather than the true cost of the energy they consume. Addressing this issue demands more than just periodic renegotiations; it requires bold structural change in how Pakistan procures, prices, and pays for electricity. By tackling these challenges head-on, we can prevent the circular debt spiral from expanding beyond the remarkable Rs13 trillion already disbursed over the past five years, and pave the way for a brighter, more sustainable energy future.